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Worldwide Tax News

Approved Changes (4)

Brazil

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Brazil Provides Transitional Relief for Local CbC Reporting of Foreign-Parented Groups for 2016 where Exchange Agreement Not Effective until 2017

Brazil published Normative Instruction No. 1.722/2017 in the Official Gazette on 27 July 2017, which amends Normative Instruction No. 1.681/2016 on the obligation to submit Country-by-Country (CbC) reports. The amendments provide transitional relief for the 2016 fiscal year in cases where there is a competent authority agreement for the exchange of CbC reports between Brazil and the ultimate parent's jurisdiction, but the agreement is only effective in respect of fiscal years beginning on or after 1 January 2017, which according to OECD exchange relationships page, is the case with most countries under the multilateral CbC exchange agreement.

The amendments expand upon the transitional relief provided by Normative Instruction No. 1.709/2017 (previous coverage), and include that despite a CbC exchange agreement not being effective for 2016 fiscal year reports, a local constituent entity of a foreign-parented group may still indicate the ultimate parent as the reporting entity in their CbC notification with their annual return (ECF) for 2016, and avoid the local filing requirement. However, the local entity may be required to adjust the ECF and submit a CbC report within 60 days if:

  • Brazil and the ultimate parent's jurisdiction have not reached agreement by 31 December 2017 to retroactively allow exchange for the 2016 fiscal year; and
  • Such other jurisdiction requires one or more constituent entities of an MNE group parented in Brazil to submit a CbC report for 2016 (i.e., the other jurisdiction has a local filing requirement impacting Brazilian parented groups).

Normative Instruction No. 1.722/2017 entered into force the day it was published.

IMF-OECD-UN-World Bank

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Platform for Collaboration on Tax invites Comments on a Draft Toolkit on the Taxation of Offshore Indirect Transfers of Assets

The OECD has announced that the Platform for Collaboration on Tax is seeking public feedback on a draft toolkit designed to help developing countries tackle the complexities of taxing offshore indirect transfers of assets. The Platform is a joint initiative of the IMF, OECD, the UN, and the World Bank Group.

The draft toolkit examines the principles that should guide the taxation of indirect transfers in the countries where the underlying assets are located. It emphasizes extractive (and other) industries in developing countries, and considers the current standards in the OECD and the U.N. model tax conventions, and the new Multilateral Convention. The toolkit discusses economic considerations that may guide policy in this area, the types of assets that could appropriately attract tax when transferred indirectly offshore, implementation challenges that countries face, and options which could be used to enforce such a tax.

Comments are due by 25 September 2017.

Italy

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Italy Extends 2016 Tax Return Deadline

On 28 July 2017, Italy published in the Official Gazette the Decree of 26 July 2017 from the President of the Council of Ministers. The Decree extends the annual tax return deadline with respect to the 2016 tax year to 31 October 2017 for corporate income tax (IRES), regional tax on production activities (IRAP), and withholding tax.

Malawi

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Malawi Publishes Transfer Pricing Regulations 2017

The Malawi Revenue Authority (MRA) has published Government Notice No. 36 of 2017, which contains the Taxation (Transfer Pricing Documentation) Regulations 2017 and the Taxation (Transfer Pricing) Regulations 2017, which replaces the prior regulations. The new regulations are effective from 1 July 2017.

Taxation (Transfer Pricing Documentation) Regulations 2017

The Transfer Pricing Documentation Regulations provide that a taxpayer must have contemporaneous documentation in place that verifies that its controlled transactions are consistent with the arm's length principle. The documentation should include:

  • An overview of the taxpayer's business operations and organizational chart;
  • A description of the corporate organizational structure of the taxpayer's group and the group's operational structure;
  • A description of the controlled transactions, including an analysis of comparability factors;
  • Details of the functions undertaken and risks assumed by connected parties in relation to the controlled transactions;
  • An explanation of the selection of the most appropriate transfer pricing method and, where relevant, the selection of the tested party and financial indicator;
  • Financial statements for the parties to the controlled transaction;
  • A comparability analysis, including s description of the process to identify comparables, basis for rejection of any comparables, any adjustments made, etc.;
  • Details of any industrial analysis, economic analysis, budgets, or projections relied on;
  • Details of any relevant advance pricing agreements or similar arrangements in other countries;
  • Conclusions as to the consistency of the conditions of controlled transactions with the arm's length principle, including any adjustments made to ensure compliance; and
  • Any other documentation or information for the determination of compliance with the arm's length principle.

The documentation should be kept in English and will be considered contemporaneous if in place by the tax return filing deadline. The documentation should be submitted within 45 days of a request by the tax authority. Failure to submit documentation will be subject to a penalty equal to the MWK equivalent of USD 1,400, plus MWK equivalent of USD 2,100 for each month the failure continues. Any person that has been subject to the initial and subsequent penalty may be subject to additional penalties in an unlimited amount as determined by the tax authority.

Taxation (Transfer Pricing) Regulations 2017

The Transfer Pricing Regulations set out the transfer pricing rules and procedures to comply with the arm's length principle. The regulations cover:

  • The definition of relevant terms;
  • The determination of whether the conditions of controlled transactions are consistent with the arm's length principle;
  • The determination of whether an uncontrolled transaction is comparable to a controlled transaction;
  • The determination of the arm's length remuneration by applying the most appropriate method selected from among the following:
    • The comparable uncontrolled price method
    • The resale price method;
    • The cost plus method;
    • The transactional net margin method;
    • The transactional profit split method; and
    • Other transfer pricing methods if the tax authority is satisfied that none of the above methods can be reasonably applied, and that such other method yields a result consistent with that which would be achieved by independent persons in similar circumstances;
  • The evaluation of combined controlled transactions;
  • The acceptable arm's length range;
  • Allowed sources of comparable information;
  • Services between related persons;
  • Transactions involving intangible property;
  • Disregarding controlled transactions for tax purposes; and
  • Corresponding adjustments for domestic transactions and for international transactions.

The regulations are to be interpreted in accordance with the OECD Transfer Pricing Guidelines, although where there are any inconsistencies, the regulations will prevail.

Proposed Changes (3)

Australia

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Australia Consults on Taxation Administration Regulations 2017

On 31 July 2017, the Australian Treasury launched a public consultation on the Taxation Administration Regulations 2017. The purpose of the regulations is to remake and improve the operation of the Taxation Administration Regulations 1976, which are due to sunset on 1 October 2017. The main changes are:

  • The structure of the Regulations has been changed from that used in the Taxation Administration Regulations 1976 to follow the Taxation Administration Act 1953 (the Act) more closely;
  • The headings to Parts of the Regulations have been updated to state whether they relate to the Act or Schedule 1 to the Act;
  • Expressions in sections that are made for the purpose of Schedule 1 to the Act take their meaning from the Income Tax Assessment Act 1997, rather than the Act. The effect of this is that a number of expressions that were duplicated from the Income Tax Assessment Act 1997 have been removed; and
  • Certain provisions that deal with withholding payments to foreign residents have been restructured so that the provisions that prescribe what types of payments are covered are separate from the provisions for working out the amount of the payment.

Click the following link for the Treasury consultation page, which includes links to the draft regulations and the explanatory material. The closing date for submissions is 18 August 2017.

Hong Kong

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Hong Kong Publishes Consultation Report on Measures to Counter BEPS

On 31 July 2017, the Hong Kong Financial Services and the Treasury Bureau published the Consultation Report on Measures to Counter Base Erosion and Profit Shifting. The report notes the results of the consultation held 26 October to 31 December 2016 on the legislative proposals to implement the BEPS package and the planned approach for implementation going forward. Key points are summarized as follows:

  • A legal basis will be provided in the Inland Revenue Ordinance (IRO) for the application of the OECD’s Transfer Pricing Guidelines, which will apply for both cross-border and domestic transactions;
  • There is no intention to introduce thin capitalization rules and no express threshold will be set in terms of an entity’s debt-to-equity ratio and the maximum amount of deductible interest;
  • Specific provisions will be introduced in the IRO to ensure that a person carrying on the functions of development, enhancement, maintenance, protection, and exploitation (DEMPE) for IP in Hong Kong will be compensated with a return on an arm’s length basis consistent with the latest guidance in the BEPS Actions 8-10 Reports;
  • Specific penalties will be introduced for filing tax returns with incorrect information on transfer pricing without reasonable excuse and/or with willful intent to evade tax, with no broad penalty protection for taxpayers who have prepared OECD-compliant transfer pricing documentation;
  • A statutory basis will be provided for the advance pricing arrangement (APA) regime, including for unilateral, bilateral, and multilateral APAs;
  • Master and Local file documentation requirements based on OECD guidance will be introduced, with an exemption for enterprises meeting either of the following exemption conditions:
    • Exemption based on the size of business: An enterprise which satisfies any two of the three conditions below will not be required to prepare a Master file and Local file:
      • total annual revenue not more than HKD 200 million;
      • total assets not more than HKD 200 million; and
      • not more than 100 employees.
    • Exemption based on related party transactions: If the amount of a category of related party transactions for the relevant accounting period is below the proposed threshold, an enterprise will not be required to prepare a local file for that particular category of transactions (if threshold not met in respect of all categories, exemption from Master file also applies):
      • transfer of properties (other than financial assets and intangibles): HKD 220 million;
      • transaction of financial assets: HKD 110 million;
      • transfer of intangibles: HKD 110 million; and
      • any other transaction (e.g., service income and royalty income): HKD 44 million.
  • With respect to Country-by-Country (CbC) reporting:
    • CbC reporting requirement will be introduced, including a primary filing obligation for ultimate parent entities of the MNEs that are resident in Hong Kong, as well as a secondary filing obligation for constituent entities of MNEs in Hong Kong if the ultimate parent entities are in jurisdictions that neither require the filing of CbC reports nor exchange such reports with Hong Kong;
    • A reporting entity will be allowed to engage a service provider to furnish a CbC report and give relevant notifications on its behalf, with penalty provisions introduced in respect of misleading, false, or inaccurate information in the CbC reports furnished by the service provider;
    • The legal framework for CbC reporting will be put in place as soon as possible, with a transitional arrangement for CbC reporting for parent surrogate filing for the accounting period commencing between 1 January 2016 and 31 December 2017 - initial guidelines are already published (previous coverage) and a Departmental Interpretation and Practice Note is to be published to further address implementation issues; and
    • CbC report exchange will be conducted on the basis of bilateral income tax arrangements and tax information exchange agreements. Agreement has also been reached in principle with the Chinese Central Government to extend the application of the Mutual Assistance Convention to Hong Kong so reports may also be exchanged under the multilateral CbC exchange agreement;
  • The BEPS Multilateral Instrument for treaty-related measures (MLI) was signed by China on behalf of Hong Kong via a territorial extension on 7 June 2017;
  • To prepare for the OECD’s peer review on dispute resolution mechanism, a legal and administrative framework for MAP will be formulated in a manner consistent with the OECD’s Model Tax Convention, the BEPS Action 14 Report, and the relevant peer review documents;
  • Spontaneous tax ruling exchange will be conducted under the exchange provision of existing bilateral agreements together with the Mutual Assistance Convention (once application extended);
  • The period for claiming tax credits will be lengthened, including that a tax credit may be claimed (a) within six years after the end of relevant year of assessment; or (b) six months after the date of notice of assessment which imposes liability or additional liability to tax under the IRO in respect of the income on which foreign tax has been assessed, whichever is later; and
  • Hong Kong tax regimes that may be considered harmful are being reviewed and legislative amendments will be considered where necessary.

The specific proposals will be further refined, with the required legislation in relation to transfer pricing, CbC reporting, and dispute resolution to be submitted to the Legislative Council by the end of 2017. Required legislation for the Mutual Assistance Convention and BEPS MLI is to be submitted by the end of 2017 and around mid-2018, respectively.

United Kingdom

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UK Consults on Draft Guidance on Reform of Corporation Tax Loss Relief

UK HMRC has published draft guidance on the application of the legislation for the reform of Corporation Tax loss relief, which will be included in the UK's second Finance Bill for 2017 to be introduced in autumn 2017. The main changes in loss relief rules include relaxing the restrictions on which losses can set off which income/profit, and limiting the off set of carried forward losses to 50% of profits per year exceeding GBP 5 million.

Click the following link for the draft guidance consultation page. Comments are due by 25 September 2017.

Treaty Changes (4)

Belarus-Pakistan

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Protocol to Tax Treaty between Belarus and Pakistan has Entered into Force

The Pakistan Federal Board of Revenue has issued a notification announcing that the protocol to the 2004 income tax treaty between Belarus entered into force on 7 June 2017. The protocol, signed 5 October 2016, is the first to amend the treaty and includes the following changes:

  • Amends Article 2 (Taxes Covered) with respect to Belarusian taxes;
  • Replaces Article 8 (Shipping and Air Transport) including expanded provisions;
  • Amends Article 10 (Dividends) to increase the withholding tax rate from 10% to 11%; and
  • Replaces Article 25 (Exchange of Information) to bring it in line with OECD standards.

The protocol applies in Belarus from 1 January 2018 and in Pakistan from 1 July 2017.

Botswana-France

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Protocol to Tax Treaty between Botswana and France Signed

On 27 July 2017, officials from Botswana and France signed a protocol to amend the 1999 income tax treaty between the two countries. The protocol is the first to amend the treaty and reportedly updates Article 26 (Exchange of Information) to bring it line with the OECD standard for information exchange. Additional details will be published once available.

Morocco-Niger

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Morocco to Negotiate Tax Treaty with Niger

Morocco's General Tax Administration has recently announced that it will begin negotiations for an income tax treaty with Niger in September 2017. Any resulting treaty would be the first of their kind between the two countries, and must be finalized, signed, and ratified before entering into force.

South Africa-Turkey

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Protocol to Tax Treaty between South Africa and Turkey has Entered into Force

According to an update from the South African Revenue Service, the Protocol to the 2005 income tax treaty between South Africa and Turkey entered into force on 15 July 2017. The Protocol, signed 25 December 2013, replaces Article 24 (Exchange of Information) to bring it in line with the OECD standard for information exchange. The protocol is the first to amend the treaty and generally applies from the date of its entry into force.

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